The dollar dropped further against the yen on the first trading day of the week as Asian markets reacted to Friday’s shockingly low NFP number which printed at 74K versus 196K eyed. USD/JPY hit a low of 103.25 in Tokyo dealing falling more than 75 points off the close on Friday as speculators continued to pare their exposure to the greenback.

Although most analysts view Friday’s downward surprise as a one off event and the broad consensus continues to believe that US growth will outperform this year, the large miss in the NFPs introduced a note of caution to the market that was unabashedly bullish dollars as the year began. With the Fed having now become very data dependent the currency market will likely follow suit and the greenback may move in fits and starts as it reacts to every major news release on the economic calendar.

With QE policy now in reversal, the FX market will become even more sensitive to changes in the rate curve with USD/JPY offering the strongest expression of that dynamic for the time being. Little wonder then that the pair continued to drift lower as US rates declined in the aftermath of the weak NFP as even a modest positive close in the Nikkei offered no support to dollar bulls.

For now the 105.50 level has become the near term top and is unlikely to be challenged until US labor data shows significant improvement. Meanwhile support lies near the 102.50 level and then much further at 100.00. A break of 102.50 could precipitate a cascade of stop selling as longer term bulls could begin to bail. With long USD/JPY positions being one of the most popular speculative trades at the start of this year, further downside US economic surprises could trigger a very nasty unwind of that trade.

Elsewhere, the currency markets were very quiet with EUR/USD holding steady at 1.3660 while cable continued to weaken dropping below 1.6450 and Aussie rallied to 9045. The drop in cable may be due to the reassessment of UK growth in Q1 this year. We noted on Friday that the latest economic data from the British Isles suggests that growth may have peaked as last year came to a close and if that indeed proves to be the case then expectations of any further tightening by the BoE will dissipate putting downward pressure on the pound.

The Aussie meanwhile appears to be benefiting from a bout of short covering both against the greenback and on the crosses. Friday’s weak US data provided the initial excuse for the move, but today’s price action suggests that the move could extend. The pair has rebounded to 9045 in London dealing and if it can clear the 9050 barrier it could triggers a squeeze all the way to 9100 as the day proceeds.

With no major economic data on the calendar the markets are likely to meander for the rest of the day with North American traders looking to test the 103.00 support in USD/JPY as attention now turns to US Retail Sales tomorrow for further examination of the state of the US economy.